allensblog

Too Much of a Good Thing......?

Historians (especially economic historians) widely believe that nations that discover a single huge natural resource (e.g., oil or gold) always rue the day.  For several reasons (in addition to the crippling corruption that always occurs), the natural resource skews (screws up) all governmental (and private) decisions.  Two main dangers:  (1) because the newfound riches make it impossible (or, at least, hard)  to calculate the "cost" dimension of "cost-benefit" analyses, lots of bad decisions (both public and private) get made (e.g., the resource gets squandered), and (2) countries that discover a single natural resource wealth always fail to diversify their economies, educational systems, and other "intellectual property" infrastructure; this is bad for the country while the resource is plentiful; even worse, obviously, when it runs out.

A couple of canonical examples are (1) Spain in the 16th century, via its discovery of gold in Central and South America, and (2) Saudi Arabia, via the discovery (by Britain) of vast oil reserves in the late part of the 19th century/early part of the 20th.

Spain's experience has been recounted many times.  A readable account (with much other interesting information and analysis) is contained in David Landes, "The Wealth and Poverty of Nations". A good book on the phenomenon (in part), more generally, is Jared Diamond, "Collapse" .

The Saudi Arabian story has also been much studied.  Tom Friedman has written about it numerous times in the New York Times (articles now only available behind the Times Select subscription wall).  Several good books (among many) on the topic are  Albert Hourani, "A History of the Arab Peoples" , Bernard Lewis, "What Went Wrong"  and Sandra Mackey, "The Saudis: Inside the Desert Kingdom".

I wonder if similar factors apply to companies.  I'm thinking Microsoft  and Google .

Seems foolhardy to wonder about Google  at the moment.  They continue to hit the ball out of the park, quarter after quarter.  But, a few years ago, it would have seemed equally foolhardy to wonder about Microsoft .  Now, after 5 years of the stock price floating within a fairly narrow band, and with the Company (1) either struggling in major new markets (the web) and/or (2) "succeeding" in new markets (e.g., video games) only at the cost of losing what has to be billions of dollars, one wonders....

For Microsoft , Windows and Office were their "gold" and "oil".  I wonder if those two gushers of cash made it hard for the Company (full of enormously smart people) to make hard decisions about where to take the business because, at least in part, there was nothing the Company couldn't do (from a financial POV).  So, it's sunk billions into efforts online (e.g., MSN), in video games (Xbox and game software), media tools, the home network, mobile, etc., with either limited success or success at enormous (and unprofitable) cost.

Same for Google ?  AdWords and AsSense are, obviously, hugely successful -- two more gushers of cash that appear unstoppable.  But what about Orkut, Google Maps, Blogger, Gmail, etc.  None of the other Google  offerings seems to have achieved anywhere near the dominance (and money-generating ability) of AdWords and AdSense, even with 20% of the Company's engineering time allocated to noodling new stuff.  This has been noted by industry observers, e.g., in Business Week, The San Francisco Chronicle, as well as others.

I wonder if the success of AdWords and AdSense makes it hard to decide what to do next because, in a sense, there's nothing the Company can't do.

Might be useful here to consider the parable of Buridan's Ass.

I'd love to hear from readers what they think.  Would also be fun to get a thoughtful response from MSFT and GOOG, although their status as public companies (subject of a future blog post) may preclude this.

Clothes (Online) Make the Man

The other day, there was a bunch of news coverage (here's the article in the Financial Times) of a  recently-released report from Shop.org about how consumers (in the U.S.) spent more in 2006 on clothes and accessories (e.g., shoes) than on computers and software.  Very interesting sign of the growing mainstream acceptance of internet retailing.

Ordinary people now outspend geeks on the internet.

Shop.org, part of the National Retail Federation and the commissioner of the report, estimated that clothing sales reached $18.3 Billion in 2006 compared with the $17.2 Billion spent on computers and related gear. The annual survey of eCcommerce (in the U.S.) found that online sales, excluding travel, rose 29 per cent to $146.5 Billion.

Analysts quoted in the various news articles about the report attributed the gains to several factors: (1) free delivery promotions, (2) generous return privileges (often free), (3) features that enhance the shopping experience (such as zoom, rotate, change colors easily) and (4) the inclusion of so-called community features such as user reviews, ratings, etc.

Not mentioned (that I saw) were other, important, but more secular, factors: (1) broadband penetration (at home, school and work) is now at a level that the online shopping experience is good for the mainstream consumer, (2) large numbers of shoppers are no longer afraid to use credit cards online (we forget, but there was a lot written in 1998-1999 about how eCommerce would never grow large because of the credit card fraud and theft problem) and (3) people are used to doing everything online now -- dating, buying a car, finding a job, etc., etc.

The report was not all upbeat.  A relatively high percentage of online shoppers (~97%) who make it to the home (or landing) pages of online shopping sites fail to consummate a purchase, including a high percentage of transactions that are abandoned even after online shopping baskets have been filled.

This is probably more of an opportunity than a problem, however.  Historically, (paper) catalogue shopping has been roughly 10% of the retail market in the U.S. (don't know the #'s for the rest of the world). Given the comfort level with ecommerce mentioned in the preceding paragraph, and the fact that the online shopping experience is far superior (even though it generates today's high abandonment rates) to that of catalogue shopping (particularly for younger shoppers -- witness my 19-year old and 21-year old), my bet is that there is a long way for eCommerce to continue to grow (especially as infrastructure in the rest of the world  improves).

This growth should accelerate as entrepreneurs find ways to mix entertainment with online shopping -- think "QVC-meets-Ebay-meets-Reality-TV-meets-Electronic Arts". This is an area we're looking at here at Mayfield.  If you have great ideas, let us know.

Size Matters

Time is the entrepreneur's most precious commodity.  For most entrepreneurs, the VC fundraising process is very time-consuming.  Bad combination.

In an attempt to help, I have previously offered tips to entrepreneurs on navigating the VC process -- "The Ten Commandments for Entrepreneurs", as well as some follow-on posts in this blog.

Here's another one.

There are many kinds of VC's.  Some focus on IT, some on healthcare, some on energy, cleantech, etc.  Some focus on early stage investing, some on later stage.  There are, no doubt, other important dimensions on which VC firms also vary.

But, regardless of other differences, one thing almost all VC's look for as the gating item in their investment decisions is market size.  Size matters; bigger is better.

Why is this?

A baseball metaphor is usually employed.  VC's, especially early-stage VC's, get paid to hit grand-slam homeruns (achieve out-sized investment returns).  In order to do this, VC's must "swing for the fences" each time they "step to the plate" (invest).  The bad news: in early-stage VC, as in baseball, if one swings for the fences every at-bat, one strikes out a lot.

One might reasonably ask: why don't VC's just "play it safe" by attempting to hit "singles" and "doubles", with fewer strike-outs?  The reason is perhaps not obvious.  Early-stage VC's don't use the "home-run every time" strategy just because they like high-stakes gambling (though some are high-stakes gamblers outside of work).  They operate this way because, in early-stage investing, it is damn near impossible to tell (with any consistency) which startups will succeed and which will fail.  One strikes out just as often hitting for a single as for a home-run -- so one is better off trying to hit a grand-slam every time.

In the VC business, it is received wisdom that no company can become large and successful unless it's addressing a large market.  In VC land, it's not unusual to hear something like: "Even good teams fail in bad markets; even bad teams have a shot in good markets."  Obviously, there are many other factors that determine success or failure of a startup, but addressing a large market is a necessary (but not sufficient) one.

Finally, most VC's (at least in the good firms, which tend to have the best deal flow) can't pay close attention to more than a small percentage of the deals that come across their desks.  So, like all human beings, VC's use triage strategies to cope.  Given that addressing a large market is a necessary condition of success for any startup, VCs ask the size-of-market question early on as a way to narrow the field of startups to a size they can manage. 

Together, these two factors, (1) necessity of large markets for success and (2) necessity for VC's to efficiently triage their deal flow, show why many VC's use market size (and structure -- see Postscript below) as an important initial filter to decide which startups they spend time on.

A first step on the path to VC funding, therefore, entails making clear to the VC's the size of the market one is addressing.

Postscript:  A useful nuance is probably worth noting here.  Sometimes, the largest opportunities lie with startups that attempt to create new markets (whether through "disrupting" existing markets or otherwise), rather than those who (merely) participate in existing markets by introducing new/improved products and/or services.  Valuable companies can be built in both situations.

"Unsubscribe" Dynamics

I'm looking for advice on prudent use of the Unsubscribe button on commercial spam.

As does everyone these days, I get a lot of spam (and that, even though, here at Mayfield, we have deployed every anti-spam technology known to man).  Increasingly (and thankfully), the type of spam is "high-class" commercial spam:  e.g., emails from Investment Banks announcing their deals, conference promoters urging me to sign up for their conference, law firms announcing a seminar for VC's, etc.  I don't get as many Viagra ads anymore, thanks to our great IT staff.

Withing the category of "high class", however, spammers still are arrayed over a bell curve of "quality".

Most of the spam that makes it through these days has a way to "Unsubscribe".  Over the last couple of years, during which the Unsubscribe button became more widespread, I have oscillated wildly in my usage of this feature. Most of the time, I've not used it for fear that hitting the Unsubscribe button not only didn't "unsubscribe" one, but actually confirmed  back to the spammer that yours was a live email address  -- and ensured one would receive even more spam as an (inadvertently) verified email user.

Most recently, I've adopted the (somewhat unsystematic) rule that (1) I hit unsubscribe if the brand of the sender seems "OK" (not sure what that means exactly), and (2) if the sender seems at all sketchy, I just delete the email.

This is, I'm sure, about as effective as burning incense to stop spam, but it's all I've had to go on, so I do it as sort of a quasi-religious exercise every day.

I would love to hear from folks who understand how the "Unsubscribe" world works, so my "religion" could become more "scientific".

Ad Spend Cut in Half?

There is a well-known lament by advertisers:  "I know half of my advertising spend is wasted; I just don't know which half."  This is usually attributed to one of three famous, early entrpreneurs of mass consumer product companies and retailers, John Wanamaker among them.

The thrust is clear:  historically, the effectiveness of "brand" advertising (~$200 billion last year in the U.S.) has been hard to check -- is my ad spend is reaching the right people? do those folks remember the brand message?, etc.  Principally, this was due to the lack of technology to check whether brand impressions reached the targeted audiences, and whether they remembered the message(s).

(BTW, much has been written about how this made for nice lifestyles for advertising agency execs and their clients -- marketing executives got to spend lots of money and build large organizations, while agency execs and creatives got to take all that money and do creative things with it (sometimes).  All the while, there was no way to see if it was actually cost-effective.  The kind of job I want in my next life.)

Brand advertisers, their agencies and online publishers are spending a lot of time these days trying to figure out how to effectively move brand advertising online.  Performance-based (cost-per-click) ads are, of course, growing like weeds.  But due to the paucity of great online content and the still inadequate safeguards against undesirable (even if unintended) adjacencies between online branding ads and content (an especially acute problem with user-generated-content), the transition is happening slower than everyone concerned would like.

Advertisers (and their agencies) claim that the draw of the web is the greater targeting capabilities they will have, as well as more (and more accurate) metrics around the effectiveness of their ads

But I wonder....

At an event for the Online Publishers Association (http://www.online-publishers.org/) a little bit ago, I made the following point during a panel:  "If (1) advertisers have historically wasted 50% of their ad spend offline (or, less metaphorically, a large percentage), and (2) if that's mostly due to inadequate technology to check targeting and effectiveness, and (3) the web offers better targeting and checks on effectiveness, does it follow that as brand ads migrate online that aggregate brand ad spend will go down by half?"

That's a lot of blood in the streets on Madison Avenue (and its ilk around the world), and a lot of unemployed marketers inside companies that heavily advertise.

If true, this is a big deal.

I'd love to hear further thoughts from readers on this.

Fidelity vs. Convenience

Recently, I’ve been considering investment opportunities in entertainment media (as part of some broader thinking about how brand advertising (as opposed to performance-based advertising) will move online). In connection with that, I’ve been also musing about whether there is a secular trend in entertainment media in which “fidelity” of the experience gets traded off for “convenience” (portability) of the experience.

Here are some anecdotal data I’ve observed, some from my kids, 19 and 21, and their friends. The data do not categorically support a hypothesis, but they do seem to indicate a general movement.

 Audio: 

When I was a teenager, we (mostly boys) were obsessed with getting the best stereo (“hi-fi”) we could afford (or build). The goal was to achieve the closest “fidelity” to the “live” (studio, usually) performance from which the recording was made. 

There weren’t many “convenience” (portability) options. Real audio “nuts” could buy portable, reel-to-reel tape recorders, but they were difficult to use, and almost no one had them. We were pretty much tethered to our stereos: turntables, tuners, pre-amplifiers (and, for the audiophiles, an amplifier) and speakers. Actually, the experience was (metaphorically) very similar to that of a desktop computer. 

Then convenience became available. The major examples: Transistor radios, Cassette Tape Players (the original Walkman), CD Players and, most recently, MP3 players (iPods being the canonical example). In each case, the (pure) audio experience was inferior to that of sitting properly positioned in front of a good stereo system: inferior system components, digital vs. analog files, smaller file sizes (e.g., MP3 vs. CD). 

Yet portable music has obviously exploded. 

Today, neither my kids nor their friends have stereos. Their laptops serve as their media centers. Whether on their laptops or through their iPods, they listen through the crummy built-in speakers (laptops), through low-end earphones (earbuds) or through decent PC speakers. Even the best quality music they listen to (MP3’s ripped directly from a CD – I hope legally) is inferior to the quality of a CD (or, God forbid, a vinyl LP). 

But, they can take their music wherever they go. 

Video:

In video, the story’s harder to decipher. 

For our purposes, the first video was films watched in movie theaters. By the mid-to-late ‘50’s, the quality of films was pretty good (film recording techniques had gotten good, and many movie theaters had good projection systems and sound systems). Obviously, however, watching a movie in a theater is not very “convenient” (in the sense of being portable). Drive-ins were, in this sense, more convenient, but lower fidelity, both video and audio (though, for other reasons, drive-ins have largely died out). 

One couldn’t watch portable video (of any type) until the ‘70’s when so-called “portable” TV’s began to appear. In this context, portable meant that you could use them in any room in the house that had reception and an electric plug. That’s also (roughly) when usable video recorder technology began to become available – though only for institutions (e.g., schools), not consumers.

In the early ‘90’s, handheld TV’s began to be sold; great convenience, terrible picture quality. 

Sales of theatrical release (and other straight-to-DVD) films for home consumption began in the late ‘90’s or early this century (can’t find the precise dates). Again, more convenience, less “fidelity” (except at the expensive, high-end, most home theater systems are poor substitutes for a modern multiplex in this regard). Portable DVD players also became available in the mid-to-late ‘90’s – lower fidelity, more convenience. 

Then cell phones and video MP3 players (again, the canonical example: the Video iPod). I was very surprised when I watched my first video on a video iPod – when you put the earphones in, that little screen becomes quite large and it’s an amazing experience (compared to one’s expectations, at least). Super convenient, but less fidelity than a movie theater. 

Not all the data line up neatly behind my hypothesis. The DVR is an example of additional convenience with no loss of fidelity. If one subtracts the increasingly annoying experience of going to a movie theater (audience conversations throughout the film, many on cell phones, etc.), it may well be that watching a DVD on a great home theater system without the annoyances of a movie theaters is better on both dimensions: fidelity and convenience. 

My hypothesis also probably only makes sense if the growth in more convenient ways to consume audio and video media has been accompanied by a decline in less convenient but higher fidelity experiences. 

Finally, there are other media types or experiences (e.g., virtual worlds, MMOG’s, video Skype-type applications, movies projected on a sheet in a college dorm room from a laptop through a cheap LCD projector, radio on the web, YouTube, Metacafe and similar sites) that deserve treatment, but time doesn’t permit here. 

I’d love to hear from anyone with other examples (or counter examples), as well with views of the implications of this hypothesis that the trend is to trade off fidelity for convenience.